Macquarie Leasing Pty Ltd v MALEK
[2006] FMCA 769
•6 June 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| MACQUARIE LEASING PTY LTD v MALEK | [2006] FMCA 769 |
| BANKRUPTCY – Bankruptcy notice – omitted note to paragraph 7 – whether an essential requirement – whether debtor might be misled – whether Federal Court authority should be followed – notice not invalid – sequestration order made. |
Bankruptcy Act 1966 (Cth), ss.41(1), 40(1)(g), 41(6A), 41(7), 52, 306
Bankruptcy Regulations 1996 (Cth), reg.4.02
Federal Magistrates Court (Bankruptcy) Rules 2006, r.4.06
Adams v Lambert [2006] HCA 10
Blackshaw Services Pty Ltd v Cureton [2003] FMCA 591
Boylan v Farthing [2000] FCA 575
Foote v Mid-West Finance Pty Ltd (1997) 78 FCR 306
Kirk v Ashdown [1999] FCA 1664
Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71
Minister for Immigration & Multicultural & Indigenous Affairs v SZANS (2005) 141 FCR 586
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129, 130 ALR 596
Re Manion; Ex parte Deputy Commissioner of Taxation(1979) 23 ALR 270
Streimer v Tamas (1981) 54 FLR 253
The Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33
| Applicant: | MACQUARIE LEASING PTY LTD (ACN 002 674 982) |
| Respondent: | SHIRIN MALEK |
| File Number: | SYG2041 of 2005 |
| Judgment of: | Smith FM |
| Hearing date: | 2 May 2006 |
| Delivered at: | Sydney |
| Delivered on: | 6 June 2006 |
REPRESENTATION
| Counsel for the Applicant: | Ms Glover |
| Solicitors for the Applicant: | Douros Lawyers |
| Counsel for the Respondent: | Mr Bowles |
| Solicitors for the Respondent: | Bowles Lawyers |
ORDERS
The notice of opposition to the petition is dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2041 of 2005
| MACQUARIE LEASING PTY LTD (ACN 002 674 982) |
Applicant
And
| SHIRIN MALEK |
Respondent
REASONS FOR JUDGMENT
This is a creditor’s petition filed on 2 August 2005, which at the request of the parties was referred to me by the Registrar for hearing. The petition relies upon a judgment debt in the amount of $50,846.09 obtained against the respondent in the District Court of NSW on 13 October 2004, arising from the breach of a commercial hire purchase agreement. The respondent has failed to comply with a bankruptcy notice issued on 19 May 2005 in relation to the debt, which was served on her personally on 12 June 2005. Subject to the matter raised by the respondent’s notice of opposition, I am satisfied that she committed the act of bankruptcy alleged in the petition and with the proof of the other matters required by s.52 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”).
Counsel for the respondent relied upon only the first two grounds in an amended notice of intention to oppose the petition, which was filed on 5 April 2006. They are:
1.The Bankruptcy Notice NN 1487/05 (“the Bankruptcy Notice”) which was served on the debtor omits to include important parts of paragraph 7 as found in Form 1 bankruptcy notice. As a result the Bankruptcy Notice fails to comply with essential requirements of the Bankruptcy Act 1966 and Regulations.
2.The Bankruptcy Notice NN 1487/05 (“the Bankruptcy Notice”) which was served on the debtor omits to include important parts of paragraph 7 as found in Form 1 bankruptcy notice and as a result the Bankruptcy Notice is capable of confusing and/or misleading a debtor.
It is conceded by counsel for the respondent that the bankruptcy notice sufficiently complied with the form prescribed under reg.4.02 of the Bankruptcy Regulations 1996 (Cth) for the purposes of s.41(2) of the Bankruptcy Act, except by its omission of a note to paragraph 7. However, to understand counsel’s argument it is convenient to set out the whole of the information section of the bankruptcy notice, to the extent that it did appear (emphasis in original):
5.Bankruptcy proceedings may be taken against you if, within the time stated in paragraph 3, above:
(a)you do not comply with the requirements of either paragraph 3 (a) or paragraph 3 (b) above; and
(b)the Court (that is, the Federal Court of Australia or the Federal Magistrates Court) does not extend, or is not deemed to have extended, the time for compliance with this Bankruptcy Notice (see paragraph 6, below).
6.The Court may extend the time for compliance with this Bankruptcy Notice if, within the time stated in paragraph 3 above, you apply to the Court on one or both of the following grounds:
(a)that you have instituted proceedings to set aside the judgments or orders in respect of which this Bankruptcy Notice has been issued;
(b)that you have filed with the Court an application (on one or more grounds, apart from the grounds mentioned in paragraph 7, below) to set aside this Bankruptcy Notice.
7.In addition, within the time specified in paragraph 3 above, you may file an application to the Court for an order to set aside this Bankruptcy Notice on the specific grounds that:
(a)you have a counter‑claim, set‑off or cross demand equal to or exceeding the sum specified in this Bankruptcy Notice as owing to the creditor; and
(b)in the action or proceeding in which the judgments or orders mentioned in paragraph 2 of this Bankruptcy Notice was obtained, you could not have set up that counter‑claim, set‑off or cross demand*.
8.You should note the following points carefully:
(a)If you file, at the Court, an application mentioned in paragraph 6 (a) or (b), you must still comply with this Bankruptcy Notice within the time stated in paragraph 3 above unless the Court extends the time for you to comply.
(b)If you file, at the Court, an application mentioned in paragraph 7 (a), you need not comply with this Bankruptcy Notice until the Court decides whether you have grounds for a counter‑claim, set‑off or cross demand. Whether you will have to comply at that stage will depend on the Court’s decision.
WARNING
9.The information in paragraphs 6, 7 and 8 is based on provisions of section 41 of the Act. The information is a summary only, and not a complete statement of the relevant law. It might be unwise to rely solely on this summary. If you need a more detailed explanation, you should seek legal advice.
It will be seen that the bankruptcy notice had an asterisk (“*”) at the end of paragraph 7, but omitted any correlative asterisk and note. In the prescribed form, the following note appears at the end of that paragraph, printed in a smaller font:
* This means that, because of a legal obstacle, you could not have raised that counter‑claim, set‑off or cross demand in defence of the creditor’s court action against you. It is not enough if, for example, you simply neglected or overlooked the matter.
The information in the note is clearly intended to inform the debtor about the established judicial interpretation of the limiting words in s.40(1)(g), to which paragraph 7(b) refers: “being a counter‑claim, set‑off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained”. That paragraph defines as an act of bankruptcy:
40Acts of bankruptcy
(1)A debtor commits an act of bankruptcy in each of the following cases:
…
(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i)where the notice was served in Australia–within the time specified in the notice; or
(ii)where the notice was served elsewhere–within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counter‑claim, set‑off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter‑claim, set‑off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;
The note to paragraph 7 of the prescribed bankruptcy notice draws a debtor’s attention to the fact that it may not be enough that he can show that he “could not” have set up a counter‑claim in the sense of “was unable” for practical or evidentiary reasons, or as a result of oversight or incompetent representation, but that some legal obstacle must be shown to have prevented it being raised in the proceedings giving rise to the judgment debt (c.f. discussion of Hill J in Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129, 130 ALR 596).
A debtor’s being informed of the technical legal meaning of “could not have set up”, may then lead him to a better understanding of the two species of applications which may be made to the court, and which are referred to in paragraphs 6 and 7 and explained further in paragraph 8 of the bankruptcy notice. The significant distinction is that a debtor’s application to the court will not produce an automatic extension of time for compliance with the notice until the application is determined pursuant to s.41(7), unless it seeks to establish a counter‑claim etc within the technical meaning of s.40(1)(g). For applications to set aside a bankruptcy notice on all other grounds, the applicant will need to apply specifically for an extension of time for compliance under s.41(6A). If the applicant does not obtain such an extension before the expiration of the time, he or she is at risk of having committed an act of bankruptcy before the application to set aside is determined. Although in some circumstances an extension may be given after the expiry of the time for compliance (c.f. Streimer v Tamas (1981) 54 FLR 253), this is not likely to be given if the substantive application to set aside is unsuccessful.
Counsel for the respondent submitted that the absence of the note to paragraph 7 in the present bankruptcy notice could be described as a “defect” in the notice, and this was not disputed by counsel for the applicant petitioner. A “formal defect or an irregularity” does, however, not give rise to the invalidity of the notice unless the Court forms an opinion under s.306 that “substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of [the] court”.
The application of s.306 to a defect in a bankruptcy notice was recently summarised by the High Court in Adams v Lambert [2006] HCA 10 (“Adams v Lambert”):
18In its application to a bankruptcy notice, s 306 assumes the possibility of some failure to comply with a statutory requirement; that is, some defect or irregularity. In the present case, if there had been no failure to comply with a requirement of the Act and Regulations, there would be no issue as to the effect of s 306. In the event of such a failure, it must be asked whether the defect or irregularity is a formal defect or irregularity within the purview of s 306. If it is, then it becomes necessary to consider whether substantial injustice has been caused by the defect or irregularity, and whether the injustice cannot be remedied by an order of the court. The questions whether the defect or irregularity is a formal defect or irregularity, and whether substantial injustice has been caused and cannot be remedied, are separate and distinct, the latter question arising only if the former is answered in the affirmative. It may be accepted that, if a defect could cause substantial injustice, it may not easily be classified as a formal defect or irregularity. But the absence of claimed injustice does not conclude the separate question that arises under s 306 about whether the defect or irregularity is a formal defect or irregularity. Neither in Lewis (where the provision under which the interest was being claimed was stated to be s 101 of the Supreme Court Act 1986 (Vic) whereas it should have been s 100(7) of the Magistrates’ Court Act 1989 (Vic)) nor in the present case was it suggested that substantial injustice had been caused by the defect or irregularity.
Their Honours at [25] followed Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 (“Kleinwort Benson”) in regarding “a formal defect or an irregularity” as being distinct from a defect resulting in nullity of the notice, and applied the two‑pronged test suggested in Kleinwort Benson:
The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice.
When determining whether a particular requirement of the prescribed form is made “essential”, a process of statutory construction is required having regard to “the language of the relevant provision and the scope and object of the whole [instrument]”, applying the test of a “mandatory” provision, adopted in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 390‑391. The significance of any matter omitted, as well as the capacity of the omission to “reasonably mislead a debtor as to what is necessary to comply with the notice” will be important considerations (c.f. Adams v Lambert (supra) at [27]‑[34]).
Counsel for the respondent submitted that the missing information which would have been provided by the note to paragraph 7 was of central importance to the intention shown in paragraphs 5 through 9 of the prescribed form of notice. This is that a debtor should be informed as to his rights in relation to applying to a court for the setting aside of the notice. The central importance of the note is shown by the distinction between the two rights referred to in paragraphs 6 and 7, which paragraph 8 advises a debtor to note “carefully”.
He submitted that paragraph 8 emphasises a benefit in making an application under paragraph 7, by reason of the automatic extension of time for compliance. The advice culminating in paragraph 8 would carry a serious risk of misleading a debtor from seeking an extension of time before the expiry of the notice, if the debtor were not warned that the reference to “could not have set up” in paragraph 7 has a technical legal meaning and is more limited than the ordinary language might suggest.
He submitted that the “disclaimer” in paragraph 9 does not diminish the importance of the note to paragraph 7. It warns a debtor only that “it might be unwise to rely solely on this summary” (his emphasis). The warning still assumes that some reliance may be given to the information in paragraphs 6 to 8, and assumes that this information will include the note to paragraph 7.
Moreover, if the note to paragraph 7 is omitted, the information in paragraphs 5 to 8 could become significantly less reliable. Even the warning in paragraph 9 itself would become less effective, because the bankruptcy notice would not draw attention to a need to obtain legal advice about what sort of “legal obstacle” could allow a counter‑claim etc to be relied upon in an application under paragraph 7. Having knowledge of the information in the note could therefore be “crucial” to a bankrupt’s ability to avoid committing an act of bankruptcy while seeking to set aside the bankruptcy notice. It is important that the notice should contain the note drawing attention to the technical meaning of paragraph 7(b) shown, because a debtor, who cannot make a paragraph 7 application, must usually make a rapid election between paying the debt or attempting to obtain an extension of time from the court before the time for compliance expires.
In short, counsel for the respondent submitted that the note to paragraph 7 is an intrinsic part of the information provided to a debtor in paragraphs 5 to 9 of the bankruptcy notice. The giving of all that information is clearly intended to be “essential” to a valid notice, and there is no reason to exclude any part of it as being inessential, including the explanation of paragraph 7(b) provided by its note. In the absence of this explanation, there is a reasonable risk that a debtor might be misled into overlooking that his application to set aside the notice might require the obtaining of an extension of time before the time for compliance elapses. Both the Kleinwort Benson tests are therefore met, and the Court could also be satisfied that “substantial injustice” would be caused by service of the defective notice and that this could not be remedied by any order.
I was attracted by these arguments of counsel for the respondent, and was inclined to find that the bankruptcy notice in the present case was a nullity. However, he properly drew my attention to a judgment of Finn J which addressed an identical omission from a bankruptcy notice, and which upheld the validity of the notice.
In Boylan v Farthing [2000] FCA 575 (“Boylan v Farthing”), Finn J addressed a prescribed bankruptcy notice which was relevantly indistinguishable from the present form. The particular notice in question omitted the same prescribed explanatory note to paragraph 7. Finn J applied the approach to the application of s.306 taken by the Full Court in Kirk v Ashdown [1999] FCA 1664 (“Kirk v Ashdown”). He said at [10] that this required an assessment of whether “the omitted matter itself was in respect of a requirement made essential by the Act. It was not the case that adherence to the requirements of the form in their totality was made essential by the Act”. At [14] he said: “the approach to be taken, then, is to have regard to the character and significance of the particular non‑compliance with Form 1 that is in question and not with the mere fact of non‑compliance as such”.
Kirk v Ashdown was subsequently held to have been “wrongly decided” in The Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33 (“Australian Steel”) at [47]. However, the majority judgment in Australian Steel has now itself been disapproved by the High Court in Adams v Lambert.
In my opinion, Finn J applied principles consistent with Adams v Lambert, and which would now be regarded as correct. Counsel for the respondent did not attempt to persuade me otherwise, but he argued that Finn J’s application of those principles produced an outcome in relation to the note to paragraph 7 which was clearly wrong.
The reasoning of Finn J was:
16In the present matter the sentences omitted are explanatory of an aspect of s 40(1)(g) of the Act and are part of the information provided to a debtor explaining (inter alia) avenues available to him or her to avoid the need for compliance. That information in its totality serves a definite informative purpose in the Form: see the observations of Foster J in Foote v Mid‑West Finance Ltd (1997) 78 FCR 306 at 307. For this reason the omission of a part of it – even where that part, as here, is by way of further elaboration of the main body of the text – cannot be said to be of such character as can simply be ignored as in the Northam case.
17But is the matter properly to be described as part of a requirement made essential by the Act? In my view it is not. It doubtless is desirable that the type of information contained in paras 6 to 8 of the Form be provided to a debtor. That information alerts the debtor, as I have noted, to courses that he or she might take. But the notice itself explicitly warns the debtor of the possible limitations of the explanation given. That warning in para 9 warrants reiteration:
“WARNING
9. The information in paragraphs 6, 7 and 8 is based on provisions of section 41 of the Act. The information is a summary only, and not a complete statement of the relevant law. It might be unwise to rely solely on this summary. If you need a more detailed explanation, you should seek legal advice.”
18When one turns to the omitted information itself, its function purports to be to elaborate and to exemplify what is contained in para 7(b) of the notice. It is, in this sense, of a subsidiary or secondary character to para 7(b) itself and as such is not essential in its own right. Its de‑emphasised level of type is illustrative of this.
19When one then turns to the warning, having regard to the particular character of the omitted information I have noted, it can properly be said that the warning is of itself indicative that the sentences omitted do not have the alleged essential character Mr Boylan seeks to attribute to them. It alerts the reader to both the purpose of, and limitations of the contents of, the paragraphs in question, even if it could be said – and I express no view on this – that the information in paras 6 to 8 of Form 1 alerting a debtor to the provisions of s 41 of the Act and to which the omitted information is subsidiary or secondary, should now be said to be an essential requirement of the Act. The omitted information, furthermore, is not itself of such character that its omission could reasonably mislead a debtor as to what was necessary to be done to comply with, to extend, or to contest, the notice.
20I am not then satisfied that these sentences fall within the nullity principle of Kleinwort Benson. Nonetheless the omission itself does constitute a “formal defect” in the notice. For this reason it is necessary to have regard to the effect of the omission as a defect for the purposes of s 306(1). That section provides:
“306(1) [In proceedings] Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.”
21There is simply no basis upon which it can be said that substantial injustice has been caused by the defect in question. Mr Boylan was well aware of the provisions of the Act in question. There is no suggestion he has in any way been prejudiced or affected by the defect.
22Accordingly I conclude that the bankruptcy notice is a valid and effectual one and reject the challenge made to it.
I have carefully considered the reasoning of Finn J. In essence, he concluded that the note was not an essential part of the form. He gave significance to the presentation of the note in a subordinate position on the form, and to the warning in paragraph 9 as to the limited reliance to be given to the explanations provided. He thought that the omission of the information could not reasonably mislead a debtor “as to what was necessary to be done to comply with, to extend, or to contest, the notice”.
These are assessments upon which minds can differ and, as I have indicated above, my own opinions tend in the other direction. However, I am unable to conclude that the opinions of Finn J were “plainly wrong”, so as to allow me to decline to follow his judgment (c.f. the discussion of precedent in Minister for Immigration & Multicultural & Indigenous Affairs v SZANS (2005) 141 FCR 586 at [35]‑[39]). In my opinion, there is a particular need for consistency in first instance decision‑making concerning particular defects in bankruptcy notices, and I consider that I should follow the opinions and outcome arrived at in Boylan v Farthing.
Counsel for the respondent sought to persuade me from this course by arguing that the judgment of Finn J was “inconsistent with” the earlier decision of Foster J in Foote v Mid-West Finance Pty Ltd (1997) 78 FCR 306. However, Finn J was aware of that case, and the defect found by Foster J in that case, the statement of an incorrect address for a court registry, has little analogy with the omission of the note to paragraph 7.
Counsel for the respondent also argued that Finn J had not addressed the potentially misleading effect of service of a notice containing an asterisk at the end of paragraph 7 with no indication of any correlative notation. He argued that an unexplained asterisk would leave a debtor wondering what was omitted, and confused as to what was needed on his part to respond to or comply with the notice. He cited Re Manion; Ex parte Deputy Commissioner of Taxation(1979) 23 ALR 270 at 279, where Lockhart J asked, rhetorically, “why should a debtor be put to the trouble of … [trying to] make sense of the words of a document, non‑compliance with which constitutes an act of bankruptcy with quasi‑penal consequences”. He also cited Blackshaw Services Pty Ltd v Cureton [2003] FMCA 591 at [10], where Raphael FM said: “the debtor is not expected or required to work these things out for himself”. However, the obscurities in the notices in those cases have little similarity with the presence of an unexplained asterisk.
I am inclined to think that the asterisk was probably included in the notice addressed by Finn J (see his Honour’s description of the notice at [6] of his judgment). Even if it were not, I do not consider that this would provide a proper basis for my distinguishing his judgment. I do not consider that an unexplained asterisk at the end of paragraph 7 could, of itself, “reasonably mislead a debtor as to what is necessary to comply with the notice” within the principle discussed in Adams v Lambert and earlier cases.
For the above reasons, I consider that both the unexplained asterisk and the omitted note to paragraph 7 should be found to be “formal defects or irregularities” in the present notice, and that s.306 preserves the notice from invalidity unless I can form the opinion that a substantial and irremediable injustice was caused by the petitioner’s reliance upon it. No evidence of this was led by the respondent, and no submission was made explaining how I could draw such a conclusion in the present case. As in Boylan v Farthing, I conclude that “there is simply no basis upon which it can be said that substantial injustice has been caused by the defect[s] in question”.
I therefore conclude that the notice of opposition should be dismissed. The applicant has established the act of bankruptcy relied upon in the petition, and has made out an entitlement to a sequestration order. No ground for declining to make that order has been raised, and I shall therefore make the usual sequestration order upon being satisfied by up‑to‑date affidavits of search and debt under r.4.06 of the Federal Magistrates Court (Bankruptcy) Rules 2006.
I certify that the preceding twenty‑eight (28) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Lilian Khaw
Date: 6 June 2006
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